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Tesla Has Another Obstacle With Tariffs

Tesla Inc (Nasdaq: TSLA) responded to the latest round of Chinese tariffs on imported vehicles by jacking up prices on its Model X and Model S vehicles in China. China has imposed 25 percent tariffs on imported vehicles as part of an escalating trade war with the U.S., and analysts say Tesla is now caught between a rock and a hard place.

Auto margins at Tesla have been particularly scrutinized due to the company’s inability to generate positive cash flow or profits. Now that China has a new 25 percent tariff on automobiles imported from the U.S., Tesla seems to be unwilling to eat that higher cost. Including the new tariffs and duties that were already in place, U.S. automakers like Tesla must now pay a total of 40 percent in duties on vehicles sold in China.

Tesla has raised the price of its Model S and Model X in China by roughly 20 percent, and the current cost may be prohibitively high for many Chinese buyers. The base Model S is now priced starting at about $128,779 in China, about 70 percent higher than its $74,500 starting price in the U.S.

CFRA analyst Efraim Levy says Tesla has no good choice at the moment, and the higher prices put China sales at risk.

“Raising the prices is going to hurt sales, but money-losing Tesla has to raise prices because they can’t afford to fully absorb the higher costs of the tariffs,” Levy says.

Last year, China accounted for about 17 percent of Tesla’s total revenue.

“Considering they claim to be capacity-constrained, they should be able to shift sales elsewhere,” Levy says.

Barclays analyst Brian Johnson says Tesla has likely already sacrificed margin in an effort to hit its Model 3 production targets, a decision that could come back to haunt the company in coming quarters.

“With productivity likely to remain a challenge for Tesla even as it ramps higher, we suspect there may be some headwinds to gross margin — potentially forcing Tesla to drive mix as richly as possible to meet its 20 percent Model 3 gross margin target at the end of 2018,” Johnson says.

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